Mediterranean Bank plc - MFSA...Mediterranean Bank plc Chairman’s Statement 1 During the past financial year, Eurozone countries continued to face important macro-economic challenges,

Mediterranean Bank plc

Annual Report 31 March 2013

Company Registration Number: C 34125

Mediterranean Bank plc Page Annual Report Chairman’s Statement 1 - 3 Chief Executive Officer’s Review 4 - 5 Statement of Compliance with the Principles of Good Corporate Governance 6 - 14 Directors’ Report 15 - 19 Directors’ Responsibility for the Financial Statements 20 Remuneration Report 21- 23 Financial Statements:

Statement of Financial Position 24 - 25 Statement of Comprehensive Income 26 Statement of Changes in Equity 27 - 28 Statement of Cash Flows 29

Notes to the Financial Statements 30 - 97 Independent Auditors’ Report Additional Regulatory Disclosures in terms of Appendix 2 of Banking Rule 7 i - xx Five Year Summary xxi - xxiv Company Information xxv - xxvi

Mediterranean Bank plc

Chairman’s Statement

1

During the past financial year, Eurozone countries continued to face important macro-economic challenges, with anaemic growth and ongoing strains in the financial sector. Notwithstanding these challenges, the 2012/13 financial year was a period of considerable growth and development for the Bank, which achieved strong financial results and a broader customer presence.

Background

During the early part of the financial year, many of the extreme stresses experienced during the previous year continued. As it emerged from the shadow of the Greek debt restructuring, the Eurozone was faced with questions and concerns regarding the broader implications of the Greek restructuring and the likelihood that it would be repeated in other jurisdictions. Markets remained highly fragile in early summer, with increasing focus on Spain and Italy amidst concerns about the health of their respective banking systems and the prospect of little or no economic growth. As policymakers scrambled for solutions, concerns regarding the future of the Eurozone intensified. Market respite finally came in the form of the Governor of the ECB, Mario Draghi, who pledged he would do “whatever it takes” to preserve the Eurozone. Together with accommodative policy actions, this pledge gave markets a significant confidence boost and led to the discounting by the markets of the possibility of a Eurozone break up. This in turn led to a sustained and powerful rally in Eurozone assets, underpinned by record low interest rates and excess liquidity in the financial system. The market rally had a particularly strong impact on peripheral Europe and brought a significant reduction in the trading spreads of government debt. The increase in market confidence enabled programme countries such as Ireland and Portugal to gain access to international funding markets and to provide a path for such countries to exit EU and IMF support. Increasing optimism in European financial markets was supported by a recovery in the US economy, a strong performance by equity markets and a general sense that the broader global economy was finally turning a corner, with vigorous policy actions being undertaken in countries such as Japan. The dark clouds of the Eurozone, however, never seemed to be too far away and returned with a vengeance in March 2013 in the guise of the Cypriot bailout. As a result of the unique peculiarities of the Cyprus situation, in order to address the sustainability of Cyprus’s debt profile, it was proposed that a haircut in the form of a tax would be imposed on Bank depositors (a first for the Eurozone). Initially, the proposed package involved a tiered haircut on all depositors, including those with deposit balances of €100,000 or less which benefitted from the Cyprus deposit guarantee scheme. After a frantic second round of negotiations and following parliamentary rejection of the initial agreement, it was decided not to haircut deposits of €100,000 or less. The terms of the bailout of Cyprus may have profound implications on the future path of debt restructurings in Europe, potentially relieving governments of the burden of supporting over-stretched banking sectors but imposing far greater risks on bank investors and depositors. After an initial period of uncertainty, the markets appear to have taken these latest developments in stride and to be treating the Cypriot situation as unique. However, fundamental policy changes within Europe regarding bank resolution appear to be a part of a new paradigm and only time will tell how this affects the proposed European Banking Union. The broader problems of the Eurozone seem to have affected Malta less than most Eurozone countries, with Malta experiencing relatively resilient economic activity and relatively low unemployment rates. However, following the Cyprus restructuring, there has been increasing market focus on the banking sectors of smaller economies, particularly Malta and Luxembourg, with comparative analyses relative to Cyprus being undertaken by various analysts and official bodies. Unquestionably, the situation that Malta faces is fundamentally different from that faced by Cyprus, in large part because of the domestic funding models of Maltese core banks and very different asset profiles. The Bank has continued to grow its business in Malta geographically, through additional branch openings and more importantly by significantly increasing its product offering to both retail and corporate customers. We are committed to continuing to diversify our product offering in the Maltese market.

Mediterranean Bank plc

Chairman’s Statement

2

Developments

The financial year 2012/13 has been a significant one for the Bank, characterised by a growing equity base, customer base and product offering. This growth has been supported by continued investment in technology, people and capabilities. I am pleased to report that during the past financial year, the Bank’s Own Funds grew from €73.14 million to €123.70 million, a significant increase in its capital base. This increase demonstrates the commitment of the Bank and its shareholders to growth and investment which has been at the core of the Bank’s philosophy since its purchase by AnaCap in 2009. In addition, building upon the success of its previous bond issues, we successfully placed into the local market an over-subscribed €12.5 million Tier 2 subordinated bond in November 2012. This bond increased further the Bank’s capital base, providing a solid platform from which to diversify the Bank’s balance sheet and product offering. Having successfully implemented a new core banking system in the prior year, the Bank carried out its plan to launch a highly innovative low cost execution platform for international and domestic investment products. The new platform brings to the Maltese market access to a one-stop-shop for a broad array of savings and investments products enhanced by free investment research and financial planning tools. We also rolled out a new corporate e-platform that enables our growing corporate customer base to access on a 24/7 basis a cost efficient payments platform and a highly competitive foreign exchange execution service. These capabilities underpin our future growth strategy and we are pleased to report their successful implementation and a very positive customer response. The Bank also successfully executed its strategy to grow the branch network in Malta, with the opening of branches in Qormi in May 2012 and Gozo in August 2012. In addition, in March 2013 the Bank completed the relocation of its Sliema Branch to a new flagship site. This enhancement of the branch network underpinned the success of our Consumer Banking strategy. Although we have no plans to open additional branches, we continue to invest in the products and services offered through our existing branches which we believe will continue to be the cornerstone of our success in Malta.

Outlook

We expect that the macro-economic environment will continue to be challenging, particularly within the Eurozone where many hurdles and obstacles remain to be overcome. However, the economic environment remains fragile, there appears to be emerging is a broader sense of optimism that a corner has been turned and the worst of the crisis is behind us. Let us hope so. We remain confident that the business strategy employed by the Bank is fundamentally sound and increasingly attractive. That strategy is characterised by a cost efficient, scalable customer platform that delivers to our retail customers consistent, transparent and competitive solutions in the savings and wealth management arenas, whilst providing similar cost effective solutions to our growing corporate customer base. That strategy will be significantly enhanced during summer 2013 as we embark on our most exciting phase of growth to date with the launch of our internet-based Belgian branch. Building on the competitive foundations that we have established in Malta, we believe that we can deliver an attractive customer proposition to an international audience and are excited by the prospects that this brings.